Markets are displaying a certain schizophrenia as investors try to work out whether the ‘good news’ is actually good for equities and traders seem nervous that the ‘light at the end of the tunnel’ might turn out to be a train coming in the opposite direction.
The FTSE is trading down at 5030 in early action and our clients continue to see any weakness as a buying opportunity. The lows yesterday were at around 5020 and punters seem confident at the moment that this will form a base this morning as well. Support is also in evidence at just below 5000 (at around 4985) and at 4965 but a break below this point will have the technical traders eying a return to 4775. At the moment the markets are starting to take good news with a pinch of salt which is a bit of a sea change from the March to October time span where even poor data was torn apart for its nuggets of gold.
While we do not see a dramatic bear market developing it must be noted that the upside above 5200 is looking a long way away just at the moment.
News this morning that the EC is forcing the break up of Lloyds and RBS is something of a slap in the face for investors and now the number crunchers will be going through every item on display trying to work out what actually is the intrinsic value of the two units when broken up. Alistair Darling’s outrageous comment that he had extracted value for taxpayers in the light of this EC enforced disaster just goes to show that he really does believe that the average voter is an idiot. The two banks as a going concern looked like returning value, if not immediately then at some reasonable time in the future. Split apart they must duplicate/triplicate functions, increase capital requirements etc, etc and therefore effectively wipe out much chance, when the next election rolls around, of Labour being able to announce that the whole BOE/Treasury bank intervention policy has actually turned a profit for the taxpayer.
Building on the theme it appears that all the dual pillared financial units might have to split into Core and Investment Banking units as one of the penalties inflicted by the regulators. Quite how weakening both parts of an operation can be considered as ‘strengthening’ the financial system I am rather at a loss to explain but, with the increasing politicising of regulatory oversight, this seems to be the pound of flesh that politicians wish to extract to show their electorates that they are ‘doing something’. As an investor I fear that banking stocks will be the whipping boys for some years to come.
The Dax, as mentioned yesterday, looks to be in a really difficult space. Spread versus the FTSE has been between 500 and 600 points for much of the last six months but in the last week this has narrowed in to just 320 (it was 400 yesterday morning). While the FTSE managed a good rally from the open the Dax spent nearly the whole day trying to hold its head above water. Our support mentioned yesterday at 5340 has now been tested twice, yesterday (from where it bounced) and right about now as I write. As stated our clients seem confident that the supports will hold with some quite aggressive buying going on in early action.
Currency markets continue to sow a marginally strengthening dollar with the Euro holding the 1.4700 level but with the rallies higher failing at lower and lower levels. The cross is sitting on major trend support and a dip below 1.4685 might be seen as confirmation of the end of the nine month euro rally. Although to actually postulate a new bear phase we would have to be threatening 1.3800 which is a step too far to talk about just yet.
Oil Continues to hold above 77 bucks for the Nymex contract but the attempted rally yesterday ran into quicksand rather faster than the bulls might have expected. The moves higher are still very aggressive but they are now running into ‘general drifting’ lower during periods when not much is going on. This is in stark contrast to the first half of October which saw continued pressure throughout the trading sessions to the upside. Whisper it quietly but there is a certain amount of trepidation that if we cannot get back onto the front foot soon the current ‘over-supply situation’ in the black stuff (which the markets have ignored for some time) might over weigh the recent concerns about future demand outpacing production.
With everything else looking nervous Gold has made a bid up to the highs again. Having tested the downside and found it not to their liking the Yellow metal is now back up above 1060. If recent history is repeated then we will fail here once more but with investors seeming to be jumping at shadows there is a good chance that another shift to the upside might be in the offing. It probably depends on many factors but Gold bears are looking over their shoulders once again.